The great uranium bull run

Uranium has been getting exposure on many different fronts recently. If you've been following the hoopla in Iran, you may recall the recent television footage showing a room full of elated Iranian scientists jumping for joy as though Iran's soccer team won the World Cup. With a zoom of the lens though it was apparent the excitement was focused on a couple of scientists who were gripping vials of what looked like rock salt.

I like to think I'm a pretty adventurous person, but you sure wouldn't catch me jumping around with uranium hexafluoride (UF6) in my hands (it's highly toxic and reacts violently with



water). This joyous occasion was warranted for the Iranians, though, as these vials were a monumental step in the Iranian nuclear technology program. UF6 happens to be the chemical form of uranium used during the enrichment process and it ultimately brings Iran one step closer to fabricating the fuel for its reactors.

Even though Iranian President Mahmud Ahmadinejad doesn't seem to have the most politically correct speechwriters employed in his administration, and his off-color comments regarding the West and Israel don't bode well for his international reputation, he nonetheless absolutely insists the Iranian nuclear program is peaceful and necessary in order to produce much-needed power for his country.

Iranian nuclear progress seems to bring fear and trepidation to various world leaders. But regardless of any personal opinions on this affair, the reason I mention Iran is that they are taking the path the whole world will ultimately have to take in order to procure the energy needs of the future.

As global energy concerns have moved to the forefront of everybody's minds, a big drive toward alternate energy is underway. Nuclear energy is becoming a steadily more acceptable alternative to the fossil fuels that power the globe today and uranium is the commodity poised to shoulder this drive.
Nuclear energy is the largest and most talked about form of alternate energy as more than 16% of the world's electricity is currently generated from it. Last summer I penned an essay discussing the current powerful bull market in uranium and in it I outlined various fundamentals that have lead to the sharp rise in price of uranium oxide (U3O8), the mineral commonly referred to as "yellow cake".

Now there are many different sectors within today's secular bull market in commodities that provide investors with opportunities to multiply their capital. The metals and energy markets have commanded the lion's share of attention thus far. Precious metals and base metals have been on a tear in recent years, greatly rewarding prudent speculators and investors. And with oil and natural gas leading the way, the energy markets have been very rewarding as well.

Uranium, on the other hand, falls somewhere in between metals and energy in its fundamental characteristics, but its performance has been in a league of its own. As seen in the chart below, uranium has been a hot commodity indeed in recent years. Even since I last wrote about it only 10 months ago it has powered higher by 43%.

As recently as 2000, uranium was trading as low as US$7 per pound, while today it trades at $41.50, a massive 493% gain in just six short years. This gain dwarfs those of most every other metal and energy commodity, and I believe there is still much more room to run.

The price for uranium today is the highest it's been in 27 years. And with its current trend it may only be a matter of months before it matches its all-time high of just over $43 per pound. But until it started to take off in 2003, uranium spent a couple decades hovering around the $10 range. There are several reasons why uranium has finally awoken from its dormant state.

Just like all commodities taking part in this soaring bull market, fundamentals are ultimately the driving force behind each secular trend. And like most other hard commodities, uranium is in the midst of a massive economic imbalance as mined supply is not even close to keeping up with soaring demand.

Though uranium has been entrenched in this imbalance for many more years than most other commodities, it is only recently the supply/demand spread has become noteworthy. Meeting uranium demand to power today's reactors has not been an issue up until now for various reasons. First, not many new reactors were being built, so demand was not growing very fast. And second, massive global stockpiles built up during the Cold War have been more than sufficient to supplement mined supply in meeting demand.

But stockpiles and recyclables from dismantled nuclear weapons are quickly dwindling and will only last for so long. And now that nuclear energy is in vogue again, the growing pipeline of reactors coming online in the next decade will substantially add to the overall demand for uranium.

Today there are 441 operational nuclear power reactors around the world and there are another 178 either in construction, planned or proposed. It is estimated that in 2006 over 170 million pounds of uranium will be required to operate these reactors. And this is most likely a conservative number considering the hundreds of research reactors, ships and submarines that consume uranium.

Interestingly, in 2004, global mined production of uranium was just over 100 million pounds. Even though 2005 global production figures are not published yet, I think it is safe to assume it to be within a few percent of the 2004 amount. If 2006 mined uranium was also in the same ballpark, which it is expected to be, this would leave a mined-to-consumed uranium deficit of nearly 70 million pounds.

This spread is obviously going to need to be accounted for by stockpiles and weapons recycling, but how much longer can those sources be sustained? There is only a finite supply of uranium above ground available to cover this negative spread. Therefore rising prices driving increasing production over many years is the only thing that will bring this supply imbalance together.

And as indicated earlier, uranium demand will not subside either. There are currently 27 nuclear reactors under construction around the world and another 151 planned and proposed - 49 of those in China and India alone. These new reactors will add further supply pressure to the already pinched producers.

The underlying reason nuclear reactors are gaining popularity is the fact that we live in an era in which the natural resources requirements necessary to fuel the growing global population and economy are at all-time highs. And the finite nature of the commodities needed to fuel this growth is starting to reveal itself. As global oil supply has perhaps hit its peak production and as the push toward environmentally friendly forms of energy grows, the coal and gas methods that provide the majority of the world's electricity are destined for reduction.

Today about 80% of all global energy is generated from fossil fuels, and this will inevitably have to change. Environmental concerns aside, there were only so many dinosaurs and plants squished in the earth's crust millennia ago able to provide us with today's energy needs.

And at the rate this planet is growing, these finite supplies will become more difficult and expensive to obtain and are ultimately running on the path towards depletion. So as the world's increasing energy demands mount mixed with an environmental push towards "clean" energy, nuclear fuel is edging towards center stage.

It is becoming more and more apparent that the world is finally starting to forget about the Chernobyls and Three Mile Islands of the past and embrace nuclear fuel as a key to the future. What's helped ease people's hesitancy toward nuclear technology is its cutting-edge developments. Next-generation nuclear reactors already in development and construction are designed to be much safer, more powerful, less wasteful and cheaper to build than legacy reactors.

Reactors such as the pressurized water reactor (PWR) and the boiling water reactor (BWR) are today's most common reactor. And even though advanced PWRs and BWRs are already in development, these reactors will always have the risk, though minuscule, of a core meltdown. Major technological advances are in place, however, that have enhanced safety, redundancy and containment rendering nuclear meltdowns an extremely-low-probability risk.

The Three Mile Island reactor is a PWR and the partial meltdown was ultimately contained in a manner in which nobody was harmed. Though it was a scary situation, the 25-year-old safety measures at this still-operational reactor prevented a catastrophe.
And new, fourth-generation nuclear reactors are now starting to appear in the limelight. Instead of the typical light-water reactors mentioned above, high-temperature gas-cooled reactors are able to demonstrate how far nuclear technology has come.

The Pebble Bed Modular Reactor (PBMR) is an amazing design coming to market soon. Simply put, nearly half-a-million fuel spheres reacting within a giant pressure vessel are cooled with chemically inert helium, the gas coolant of choice in High Temperature Reactors (HTR), while the gas in turn transfers the heat to a power conversion system which converts it to electricity.
This technology is quite fascinating. Each fuel sphere encases a 0.5mm particle of enriched uranium properly coated and encased in graphite forming a sphere, or pebble, the size of a tennis ball. Housing these hundreds of thousands of tennis-ball-sized pebbles is a giant pressure vessel about 20 feet wide and 100 feet tall. This vessel is lined with a 3-foot-thick layer of graphite bricks that serve as neutron reflectors and passive heat transfers.

These pebbles heat up from their internal nuclear fission and become extremely hot. In order to remove the heat generated by this nuclear reaction, helium is pumped into the vessel. It enters the vessel at about 500 degrees Celsius (932 degrees Fahrenheit), absorbs the heat, and is driven to the bottom of the vessel into a low-pressure turbine at about 900 degrees C (1,652 F). After the turbine does its magic, the helium is cooled, recompressed, reheated and pumped back into the vessel to repeat this process. Because PBMRs are HTRs, they are far more efficient in converting heat to electricity (in general, efficiency is higher at higher temperatures of operation).

The best part about a PBMR is its safety. Conventional reactors require water and control rods to stay safe; if anything happened to these systems and there was not a quick resolution, a meltdown could occur. But unlike the water used in conventional reactors, the gas used in a PBMR cannot absorb neutrons or become radioactive.

Furthermore, the top temperature reached in the PBMR is, by design, well below the temperatures that could cause a physical breakdown of the fuel pellets. Therefore, even if there is a complete system failure, the reactor will stop any nuclear fission and go idle by itself, allowing the pebbles to cool down naturally. The simple physics of the PBMR design preclude it from entering a runaway nuclear reaction.

And as far as costs go compared to conventional reactors, the PBMR does not need safety backup and off-site emergency support, hence noticeably lowering capital expenditures involved in planning and construction. The M in PBMR also proves important as they are modular by design. 10 PBMRs in one station can exist within an area the size of three football fields and produce 1100MW of electricity, which is enough to service about 300,000 homes.

Another HTR being rolled out is the Gas Turbine - Modular Helium Reactor (GT-MHR). This larger-than-PBMR design uses an annular (doughnut-shaped) core with 102 hexagonal fuel element columns of granite blocks. In the core the gas flows through coolant channels within the fuel elements into a power conversion system, which is housed in a separate vessel containing a gas turbine, generating electricity in a similar fashion to the PBMR.

The GT-MHR also touts a meltdown-proof reactor with massive improvements in thermal efficiency increasing it by about 50%. Because of its significant thermodynamic efficiencies, the GT-MHR yields 50% more electrical power from the same number of fissions as low-temperature reactors and also significantly lowers the amount of radioactive waste produced per unit of energy.

These are only a couple of the many new reactor designs today, and such advancements in nuclear reactor technology only solidify the case for uranium. As reactors become safer, cheaper and easier to construct, nuclear fuel will power more and more homes and businesses in the coming decades. And unlike fossil fuels, there is an abundant amount of uranium in the earth. But just like most other commodities, it is going to require significant time and capital in order to ramp up production to meet the demands of today and tomorrow.

The chart below provides a snapshot of not only the secular bull market uranium is carving for itself, but the much similar trend of commodities in general. The commodities bull market is represented by the venerable CRB Commodities Index. This index serves as an excellent proxy for the strategic trend of the overall commodities markets.

The commodities that have powered the CRB higher are metals and energy. Even though uranium is not a component of the CRB, it has a similar nature to the all-stars that comprise it. Many of the metals and energy commodities have experienced greater than three-digit gains so far, but uranium has outpaced them all by quadrupling since 2003.

The reason for uranium's incredible gain is its fundamentals. There are estimated to be over 3 million metric tons of known recoverable uranium reserves, triple this in conventional resources and even more with recalculations based upon today's prices. But getting it to market is the hard part.

Just like pulling any metal from the earth, it requires a great deal of capital to explore, develop and construct a uranium mine. And because uranium prices had been so low in the last 20 or so years, very little uranium exploration took place and very few significant discoveries were made.

To add another twist to this already short-supplied market, many mining companies are struggling with governmental red tape and foot-dragging in bringing uranium mines into operation. Uranium more than any other metal has strict regulatory measures due to the environmental and social risks involved, or perceived to be involved, in bringing it to market. And according to the CEO of Denison Mines, a large Canadian uranium producer, the red tape is getting even thicker.

Now if this were the chief of a small uranium company in an obscure part of the world, I'd be a little less concerned. But Denison is a significant uranium producer and of all countries to have bureaucratic incongruities, Canada is the one that concerns me the most. Canada just happens to be the country with the third largest uranium resources in the world and is the largest global producer.

Peter Farmer of Denison chimed in his concerns in a recent interview after his company's annual meeting in April. Farmer echoed the strain suppliers are under as demand is growing, and went on to criticize the bureaucratic constraints miners are experiencing. Farmer points to the Canadian Environmental Assessment Act, recently signed into action, as a cumbersome delay in the licensing and permitting process for project development and hints that the Canadian Nuclear Safety Commission is seemingly in an administrative maelstrom.

In Canada it now takes longer today to obtain a project permit than it did several years ago, when the price of uranium was depressed. And in Australia, the second-largest uranium producer, I am told it is just as difficult if not more difficult to obtain the appropriate permissions for development.

Another interesting insight from this interview, which I suppose makes sense, is that most of the natural resources regulatory agencies are having serious personnel issues. I would suspect this spills over to all of the commodities sectors in that many of the government employees are switching from the public sector to the private sector with promises of big salaries and hefty options. So mixed with the new rules and regulations, there is an administrative backup miners are having to deal with.

Though this red tape proves quite unfortunate today, it is time to play catch-up for uranium explorers. In order to meet the growing demand for uranium, many more mines will need to be constructed and many more economical discoveries will need to be made.

The good news is with uranium at $41.50 per pound today, there is ample incentive for prospecting activity, and a lot of companies are taking to the hills in search of the next great uranium deposit. And for investors, the only way to take advantage of this run in uranium is through these companies that will bring the yellow cake to market today and tomorrow.

Uranium stock investing has really caught on since last summer when I first wrote about it. I have been tracking dozens of these companies and have seen this sector catch on like wildfire. Any publicly traded company that has staked a claim on a potential uranium deposit has seen its stock go through the roof.

In my previous essay I explained in detail how uranium is traded, but in a nutshell it is not traded on the futures markets. For investors getting the itch to take part in this bull run, uranium stocks are the only way to go. Unfortunately there are not that many real good ones to choose from as there are only a handful of producers publicly traded.

But the list of junior explorers, mining hopefuls that are ultimately the future of bringing more uranium to market, continues to grow. Rapidly emerging within the resource-friendly Canadian exchanges, uranium juniors have been the talk of the town. Ambitious businessmen and geologists are forming uranium exploration companies and many existing mineral miners are shifting their focus to uranium in order to capture the massive influx of capital pouring into uranium stocks.

As explorers, developers and producers struggle to bring their product to market, the stocks of the companies well-positioned to capitalize on the increasing uranium price will continue to skyrocket. But prudence is extremely virtuous in this realm. When speculating and investing in uranium stocks, it is very important to discern between the fly-by-nighters and the legitimate explorers. In addition, uranium is just one of many commodities poised to excel in this continuing bull market.

The bottom line is the uranium needed to fuel the growing nuclear-friendly economy is in major short supply. Even though the price of uranium has rapidly ascended of late, $40 uranium may seem cheap years down the road. The companies that are able feed this market will greatly prosper until this economic imbalance disappears. Investors and speculators can take part in this enduring secular bull market by buying stocks in these companies, and the rewards should be legendary.

Scott Wright is an analyst at Zeal LLC.